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Westpac economist warns 'low interest rates for longer' policy risks heating housing market to 'frothy' levels; sees 8% house price growth next year as OCR on hold til July 2013

Property
Westpac economist warns 'low interest rates for longer' policy risks heating housing market to 'frothy' levels; sees 8% house price growth next year as OCR on hold til July 2013

By Bernard Hickey

Westpac Chief Economist Dominick Stephens has warned that an extended period of low interest rates risks heating up the housing market from warm to ''positively frothy" and does nothing to redress the economic imbalances forcing New Zealand to keep borrowing heavily from the rest of the world.

Stephens forecasts in Westpac's quarterly overview the Official Cash Rate (OCR) is likely to stay at 2.5% until July 2013 and could even be cut to 1.5% if European financial markets experience 'Euro-geddon'. He expects the Reserve Bank to start increasing the OCR from July next year to 5% by March 2015. Westpac now sees a peak in the OCR of 5.5% in late 2016.

He forecasts house prices will rise 8% next year, on top of a 6.5% increase this year and up from his previous forecast for 2013 of 3% house price growth. That would imply a 15% rise in national house prices over the two years from the end of 2011 to the end of 2013.

The extended period of low interest rates was a factor driving house prices higher and the Reserve Bank risked missing a surge in inflation from the Christchurch earthquake rebuild, he said.

"The Reserve Bank is leaving interest rates low because inflation is unthreatening and the exchange rate is uncomfortably high. This situation could persist for a while, so we now expect no change in the Official Cash Rate until July 2013. But if interest rates stay low for longer, the housing market could go from warm to positively frothy and that would have a commensurate effect on consumer spending and debt levels," Stephens said.

"Although we don’t expect a replay of the self-reinforcing spiral of rising house prices, debt and spending that characterised last decade, we are concerned that New Zealand’s economic imbalances could make a comeback of some sort. As Mark Twain once said, history doesn’t repeat itself, but it does rhyme," he said.

"The most significant development in our forecasts is that we now expect the rebound in house prices to extend further – on top of a 6.5% increase this year, we expect an 8% rise next year (previously 3%). The combination of rising house prices and a long stretch of low interest rates will have a commensurate effect on consumer spending and credit growth and could lead to a growing conundrum for the RBNZ."

Stephens said the 2002 to 2007 boom period was characterised by an upward spiral in house values, household debt and consumer spending.

"That period was driven not just by lower mortgage rates but also a favourable tax treatment for highly leveraged property investment. Easy credit and a booming economy gave people the confidence to take advantage of these conditions, and household saving rates turned sharply negative," Stephens said.

But the environment after the Global Financial Crisis (GFC) was markedly different.

"Household saving rates have turned positive, and credit growth now lags behind income growth. Housing debt has grown just 1.5% in the last year, compared to the double-digit growth rates of 2003- 2007. Some of this can be attributed to ‘deleveraging’, albeit mostly of the passive kind – since mortgages have a schedule for repayment of principal, deleveraging is the default setting. There is also a portion of borrowers who have kept their repayments the same in dollar terms as interest rates have fallen, so that they are repaying principal faster (though the implication is that this will reverse once interest rates rise)."

The absence of leveraging had been a greater force as cautious consumers held back from taking on ever-higher levels of debt against the same properties, which meant the links between house values, household debt and consumer spending were more ambiguous than during the 2000s.

"However, the chain of causation from interest rates to house prices remains very much intact. This points to substantial upside to house prices if, as we expect, the subdued outlook for inflation leads to an extended period of low rates. Our forecasts imply a stabilisation or even a modest fall in the household saving rate – that is, growth in consumer spending will rise to be more in line with growth in actual and expected incomes. That’s still a sharp contrast to the rapid spending growth during the last housing boom."

Wider current account deficit and need for structural changes

Stephens said Westpac expected New Zealand's current account deficit to widen from its current 4.5% of GDP to a peak of 6.7% next year with the imported component of the Canterbury rebuild accounting for about 1 percentage point of the widening.

"While high by global standards, this would be well short of the 8.9% peak reached in the previous housing boom – and just as in the last decade, there is no indication that such a deficit will harm the appeal of the New Zealand dollar as an investment destination," he said.

"Nonetheless, it’s a stark reminder that the need for longer-term structural changes to the economy remains undimmed by the recession or the GFC. A long period of low interest rates will only work to sustain these imbalances."

(Updated with peak OCR of 5.5% and total house price inflation in 2012/13 of 15%.)

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52 Comments

I dont get it , what would be the negative consequences of an LTV  ratio of say 90%?

The positives are evident , we prevent another bubble , reduce tax free speculative actitivy , put a cap on prices , and instill a savings culture among ordinary New Zealanders to but their first home . We would thus  direct discretionary  investment money into more productive sectors  

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Maybe because it advantages the already rich making home ownership even harder for those that need it and easier for those who already have equity to gather multiple properties?  

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If we had done it in 1997 when a LVR of 80% was usually? the max not much.

Steve Keen wrote a piece I think on why the LVR is very good and first time buyers grants very bad. NB Not only having a LVR but allowing the RB to vary it directly impacts housing unlike a OCR move which impacts many things.

The problem is that LVR needs to be around 80% +/- a bit....and not 90%....or 95% which is quite common now.

So as Steve Keen says its not the first time buyer with an LVR of 90% thats the only issue its the seller and thier subsquent purchases, the knock on effect. So that seller gets more $s which in turn with a high LVR allows them to leverage even more as well and up it goes......

So the problem is the amount you vary it is quite small, a 1% change has a big effect.   Now consider that if 80% is the "natural" number and we have 90% its highly supportive of prices and rises...so dropping 10 to 15% would be devistating to the property market....in effect most first time buyers would go bye bye and those in a house couldnt move if thier LVR was say 92%....

So yes 90% would probably have to be it and you would have to get to 80% over a decade, 1% off every year wouldnt be good for a dodgy housing market even then....its going to be a slow grind.

regards

 

 

 

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He forecasts house prices will rise 8% next year, on top of a 6.5% increase this year and up from his previous forecast for 2013 of 3% house price growth. That would imply a 15% rise in national house prices over the two years from the end of 2011 to the end of 2013.

 

Which strata of the raw stratified REINZ data is Stephen's referring to and hence which social cohort - John Key's smart arse tax avoiding capable rich pricks in Auckland gambling with my deposits at 10% down? Certainly not the majority of Kiwi home owners.

 

Colin Riden's strata data is at odds with Mr Stephen's bold sweeping claims.

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I predict Zoro's predictions will be wrong ONCE AGAIN.

8% next year? Central Auckland, maybe. Nationwide - no way

2-3%, maybe

 

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Ole !

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Hypertiger

The debt supply is deflating in relation to the long term growth trend.



all the manipulation is to fill the hole so as to allow the inflationists to claim that there is no deflation.



The dust bowl was caused by soil depleation...Prior to the crop failurs and the clouds...it was invisible...everone was oblivious of the deflation.



As you inflate...the deflationary potential increases...Until you reach the point where you fail to obtain the required amount of inflation to overpower deflationary potential.

 

http://forums.wallstreetexaminer.com/topic/1044755-chs-finally-nails-it…

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yes....

Its like pouring a cup of water into a bucket with a big hole at the bottom and expecting it to fill up.

Until you plug the hole (banks) and then get the will (congress) to pour money in you will get no where...

and even then...

Im not so sure they are oblivious to deflation or that it isnt happening just they are terrified that admitting it as it will be be like the emperor's new clothes, and then hell breaks lose.

regards

PS "[Central Bankers'] job, such as it is, is to deflate a tottering system based on phantom assets slowly enough that it doesn't implode."  Nice point.

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Looks like Olly Newland's prediction that some house prices could double in the next few years is coming true.

Olly's forcasts have been more accurate than all the economists ever were.

Guess 50 years in the market gives him an edge over the still-wet-behind-the ears commentators. 

Even if he is right only half the time it still would be better than that lot.

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Low interst rates for the next few years, inflation hitting at some point in that time, increased demand due to leaky building and CHC destruction, I do not think there is another asset class in NZ with as much potential increase.

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And that's exactly what Warren Buffett has been saying too!

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"inflation hitting at some point in that time" not if you are a deflationista. After 4+ years of the inflationists predicting inflation and not only that, noticable inflation ie well over 5%...we see if anything dis-inflation....ie dropping below 1%.....

Now in some spots noticably Chch and Auckland, yes sure we have an over-riding buying effect....the rest of NZ looks enemic at best, more likely diabolocal.

The potential isnt increase but decrease, the only sector I expect to do worse and faster is the share market....GBH better have a plan B.

regards

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GBH has a positive outlook on his investing...he will be fine.

So will I. Us property investors are very cheery.

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Must be the prozac....you will need a big bucket of it.....if only when empty to puke in...

regards

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Someone on this board says it best "inflation on what you need, deflation on what you want".

 

Possibly every asset class will do badly...then at low interst rates , borrowing to buy property doesnt look too bad against the others. Obviously there comes a measure of affordability, but see above, if it comes down to it, you pay the rent before you buy a TV.

 

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Inflation on what you need? People need housing so there will be inflation in housing then.

I agree.

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Fairfax

Question: And why will interest rates remain low for a few years?

Answer: Because the economy will continue to struggle, and probably worsen, as Europe deteriorates and China / Aus slow 

So yes low interest rates will support housing, but to provide a balanced view (unlike Zoro's) you need to acknowledge that the low interest rates represent a weak economic picture which will provide downside to housing demand which balances the upside of lower interest rates.   

There are relatively complex relationships, not simplistic ones as some would seem to think....

Another example. Take the slowdown in mining in Aus. This wil undoubtedly lead to lower emmigration of kiwis to Aus. Now on the one hand you could say this will provide upwards pressure on NZ house prices as net immigration increases. But on the other hand it is likely to lead to rising unemployment which is going to create fiscal pressures, and govt cut backs, feeding back into more job losses and economic weakness.

It is these types of counterbalancing outcomes that make me think nationwide house price inflation is likely to be 2-3% next year rather than 8%

that's why I predict Zoro's poor forecasting record will continue - he clearly does not understand complexity     

 

 

 

 

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Complex issue for sure.

 

My point reference inflation is in regards to the massive amounts of quantative easing, presumably to inflate away the debt via stealth, interest rates remaining low due to anaemic growth. Hence my call that property is not a bad current bet, low interest, potential inflationary pressure.

 

I am not a spruiker by the way and am generally a property bear, I just dont see where else all this moolah being printed is going to end up.

 

To make myself feel better however, I would forsee that the government will not allow the re-bubble and make some significant changes, whether to LVR/RMA/zoning/compliance costs so if you were getting in, you would get in quick as you dont want to be the biggest fool.

 

3% does sound a bit more realistic than Zoros prediction. I can still remmeber him wagging his finger at an audience stating that there would be six interest rate rises over the previous 18 months....

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he's a twat, and an incompetent one at that. Most people with his success rate would be in a dole queue, not a "chief economist" or whatever he's called

Everyone is wrong sometimes. It's just he's been very wrong very often

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Remember population increase is government policy so you guys might have cheated [ risk management]:

 

''This created a buoyant economy, thanks to a rapidly-growing people servicing sector and migrant servicing sector.''

In other words, Melbourne is growing for the sake of growing, racing towards a population of 5 million, using other people's money.

 

http://http://www.smh.com.au/opinion/politics/the-yarra-monster-is-killing-us-20100822-13apt.html#ixzz22GnjXjDy

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Certainly in Queensland if not extending over the border into NSW the housing bubble did not so much pop as go Kabloowie.....Pages 18 /19 of the Suday Mail showing properties from North Coast through Brisbane down to the Gold Coast at 30% drops in a four month period  ..

High end houses and apartments sitting idle , not a buyer in sight for well over a year... 

Houses a plenty in the 560k range slashed to 340/ 380k with many of them 1st time buyers who have recieved the proverbial pants down. .......

So I gave a rele a call to inquire if this was right, she said values of the houses bought around her in Wynnum over the last few years had taken a hammering and some of the young couples who had over extended and bought them found the going to tough as one or the other fell out of work, and so are finding themselves looking to cut their losses.

Interestingly enough she said further that it seemed to her that the relationships ( in some of the neighbours she'd met) had  broken down whether or not as a consequence she couldn't say.   But I'd guess there must be a load of pressure there.

Westpac says it's all a bit frothy here (N.Z.) with good reason... as the picture in Aus is building and it's not pretty.

Dear property investor ....you have been warned......but Ollie will tell you it can't happen here right..?                                                   

Frothy ....now there's a word, understated though it may be...!

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Just bought our own home in Brisbane, not far from CBD.  What we paid is 7% lower than what the previous owner paid for it at the end of 2010.  That's not taking into account the cost of stamp duty and agent fees.

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That is probabl a fair reflection Chairman of the rock in the pond principal, as you are close to the CBD the fall is less for the moment.

Out of interest, in which direction close....toward Grange...toward Rocklea...?

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Just behind Royal Brisbane Hospital...

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Hmmmm. Herston therabouts...that is close , what a couple of k or so to the gabba....maybe four from the city.....I was looking at a place over in Hamilton...quite nice area, near the race track thingy , I did have occassion to utilise your public transport there and thought it was pretty damn good and fairly easy to access different parts of the city. 

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Yes Herston is my new hood, almost 3km to central CBD. Gabba...you mean SunCorp Stadium, that's about 2km.  Gabba is on the south side of Southbank (cricket and AFL, which I am not much of a fan).

As for Hamilton... you have far too much moolah! But still way better value than Auckland eventhough it's my home city.  And my yearly rates bill is about $1500 instead of almost 4 grands in Auckland..

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Well I gotta say Chairman it's looking good to me right about now....if I could just slip past the pesky wife....nip out for cigarettes, with a cheery back soon honey...........

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Maybe it's this time of year with the cold and rain but Queensland and deflating housing prices, especially on the Gold Coast, look pretty good along with higher Australian wages. A 2 brm place a few minutes from the beach for $225,000 appeals to me far better than a cold, damp dump in Auckland.

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Mist42NZ

Your comment (and the ones underneath it) was deleted because you used an offensive word.

You can have your say. Just use your imagination and analytical abilities rather than resorting to swear words.

cheers

Bernard

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Aw geez Bernard that's gonna make Yay it's Friday a bit on the tough side.......I'm actually gonna have to think now.....I can feel a headache coming on....

I have to say though in Mist's defence , sometimes , just sometimes , in life there is no substitute for a good old unacceptable foul word.

Parking Wardens

City Councillors

Politicians

Prime Ministers

T.V. commentators / presenters

Investment Bankers

Oh yes, all are deserving of as many as you can rattle off in 60 seconds. 

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Christov you forgot financial website editors !

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Your gonna get me banned Kermie....he's in the mood....I'm on eggshells, taste like crap but I'm not puttin on any weight. 

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Bernard, would you be kind enough to give us a list of words we arent allowed to use ?

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Clever Kermie, but you won't catch ol; Bernard out with that one....!

and don't forget the Most Overused Rude Obscenities Nominated are also a banning offence..!

Sigh..! Wednesday it's neither here nor there is it.

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Words like: ##4%^, %%^&%, ╩p╜i╩, ♂◙♪♫☼

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Yes those ones Chairman , and if you were to say something inflammatory like oooh ...ahh.

May all Baby Boomers live long and prosper at the expense of those ungrateful layabouts smoking drugs and awaiting the cash cow to deliver.........or

Roubinni is gay......................................................... and wrong....or

Property  investment is the only true way to be a productive member of society in N.Z.

 Yes all those could get you banned , but obviously I'm just giving examples here.....

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Since we're living on the edge today....

Property prices wont fall by 30%.

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You can't say house prices are increasing, as that would be unfair

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Why does everyone now assume that banks here will be able to borrow at low rates even if the RB tried to go lower with the OCR? The closer we get to the big guys, the lower the interest rate differential, the closer we get to the point where markets decide the risk isn't worth it. If a big meltdown comes again money will be flooding out of NZ not in. The NZ banks and the RBNZ hung on by the skin of their teeth in 2008 with some help from the FED. Even Bollard admits it was good luck not good planning. Interest rates are just as likely to go through the roof as go down if the global economy tanks, and the NZD to revisit US40-50c.

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If NZ is gonna do 8% it feels like central Akl will do 16% based on what I'm seeing at the mo - froth rising to the top

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I think we are all going to be very surprised at how much the housing market moves up in New Zealand. There has been five years of no growth and pent-up demand.

The boom might not be like 2002-2007 but it will be a big one all the same.

And not just in Auckland either...look at many of the provincial centres, their "time to sell" on the market has fallen significantly. I predict the regions will do what Auckland will do ie boom, but be a bit slower getting there.

No worries for all of us on interest.co.nz though. Through the efforts of SK, yours truly and a few others, we are all well placed to benefit from the coming boom.

Bring it on.

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"And not just in Auckland either...look at many of the provincial centres, their "time to sell" on the market has fallen significantly."

Care to point us towards some stats to back up that outrageous piece of spruiking? The reinz stats in July paint a different picture - median days to sell flat at best, increasing in many regions - even Auckland is flat.

 

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My 2009 first home purchase doesn't seem like such a bad idea now. I think it's completely mad what the property market's doing here, but we'll probably sell up here for a "frothy" price and buy in Aus in a couple of years where things seem to be (more sensibly) going south. Only in NZ could there possibly be a property boom in times like this!

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Another happy punter bailed out by unearned income - just another miracle of ponzi finance -

 

John Key had better keep the deficit finance machine up and running - thankfully he saw the folly behind his balanced budget rhetoric this week, and ordered up a fresh NZD 540 million batch of newly printed bills to oil the wheels of Auckland's version of Disneyland. 

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What do you mean "unearned income" Stephen?

Mark probably went to work, worked hard, saved his money and put it into a property.

He has carefully managed his finances and gained his rewards.

Well done to him...but not very pleasent of you to say it was "unearned". 

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That's high praise, you're making me blush!

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Landlord are you the PR rep.?

I mean exactly what I said 

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So if someone puts their money anywhere other than under the mattres they are earning "unearned income"?

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Dear landlord - go back one further space. Stop. Think.

"Earned' is a misnomer. If you buy (and most landlords don't yet own) an existing house, then you've gotten a pile of processed resources, representing a quantity of expended energy.

 

You presumably expect to 'make money' What do you want that money to buy? Other processed resources, representing other quantities of expended energy.

 

A capital gain (number changes on paper, no change in the house) blindly - with no correlation - expects commensurate resources/energy.

 

Rental expects to soak from the tenants income. This in turn is either reality-based, or as unguaranteed as your capital-gain underwrite. A classic example of a worthless (not guaranteed to be underwritten by resources/energy) tenant income would be financial adviser, a worth-something income would be miner. (Temporarily, all things run out).

 

Things worked on the up-side of the Gaussian curve, but most folk forgot to keep an eye on the underwrite.

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The average Canadian home price is at 7 x the median household income. Note that the US housing bubble burst at 5.8 x median income. Canadians do tend to have more equity in their homes though so the pop shouldn't be quite so spectacular.

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Dominick S was the first mainstream economist to come out years back and nail the links between housing unaffordability, lack of supply, cheap credit and the resulting cartels and rung-chopping of the first steps up the housing ladder.

Lack of supply is still a huge issue - see the Productivity Commish on this, and note that only 5 builder organisations in NZ churn out more than 100 houses per annum...against a supply need in AKL alone for 10K plus.

 

Lack of supply (zoning, plannerista, dev conts, ghastly builder productivity)

Land banking

Cartels perhaps and a duopoly for certain, in building materials

Cheap credit and light regulation/clueless central banksters

 

Hissssssss....

 

Jest lissen ter them Bubbles inflating!

 

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